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Another common LLC question that I get is,
Do I need a business bank account for my LLC? Or can I just get away with a personal bank account where I keep the LLC’s money?
By the end of this video and post, you’ll know:
- Why a business bank account for your LLC is a must-have
- Why you don’t want to mix your money and the LLC’s money
Watch the short version | Read the long version
Video Links
- I use Novo as the bank for my LLC. Use this link to sign up and we’ll both get $40*!
- Curious about what other tasks you should be doing to keep your LLC’s fence strong? Then read this in-depth “keep your LLC legit” post.
- Want my help creating your LLC (or keeping your existing LLC legit)? Then grab my brand new LLC book via Amazon*!
- Want to hire an attorney to create your LLC instead of DIY’ing it? Then watch this episode of Ask Kiff to learn how to find the right attorney.
- Think that you might use LegalZoom rather than hiring an attorney? Then watch this episode of Ask Kiff to learn when it is (and isn’t) a good idea.
- Learn more about the artist’s Courtyard membership community here.
Are you overwhelmed by the legal jargon associated with creating an LLC for your creative business?
Do you wish you had a straightforward roadmap to feel confident that you created your LLC right (and know the expectations to keep it legit)? Then this is the book for you!
When you buy LLC for Your Creative Business, you’ll get my step-by-step guidance through the process of creating and maintaining an LLC for your creative business without all the legal confusion.
(If you use the above Amazon affiliate link, I’ll make a small commission, but it doesn’t change the price you pay.)
Read
One of the most common ways LLC owners poke holes in their fence is by failing to keep an arm’s length between the LLC’s money and the business owner’s personal finances.
When you create an LLC, you create in effect a legal person. You and your business are no longer one and the same. In order for your LLC to have any money, it must have accounts in the LLC’s name.
If you are setting aside money to pay sales tax, then that is the LLC’s responsibility. So sales tax money needs to stay in the LLC’s name and needs to be in an LLC bank account.
If you are paying yourself, you need to pay your bank account and then pay your bills out of your bank account. You can’t pay your personal bills out of your LLC’s bank account.
This means in order to keep your LLC fence strong you cannot:
- “borrow” money from the LLC without documenting it
- pay yourself willy-nilly
- pay personal bills from the LLC account
- pay LLC bills from your personal account
If you fail to separate your finances, then your LLC fence will fail.
Get a business banking account
Back in the old days, a business banking account was going to cost you money. These days, it doesn’t. Today, there are lots of free online business checking that have no minimums and have very low fees. (NerdWallet is a great resource to find these and I use Novo as the bank for my LLC. Use this link to sign up and we’ll both get $40*!)
Again, since the LLC only has money if it’s in the LLC’s name, you’ll be required to get a business banking account, not a personal one.
Start your LLC off on the right foot
The first thing you need to do is to make sure you initially invest enough in your LLC.
What do I mean by this?
If you are already in business
If you already are running a business, you have a pretty good idea of what your expenses are each month. And what income you are making each month.
So what I would encourage you to do is figure out what your:
- most expensive months cost
- least income months bring in
And then calculate the difference between the two numbers.
Say in your most expensive months, it costs $5,000 to run your business. And in your least income months, you’re only making $3,000. That’s a $,2000 difference.
Then take that difference and multiply it either by three or six.
So in our example, $2,000 times three would be $6,000. And $2,000 times six would be $12,000.
You want to make sure by the time you transfer your existing bank accounts into the LLC’s name that there is somewhere between $6,000 and $12,000 in those accounts.
And if there’s not, you are going to take money out of your own personal accounts and make up the difference, so that the LLC has enough money to run in your worst months.
If you are just starting your business
If you have a brand new business, then you have to estimate what your monthly expenses are going to be.
Once you know that, you are going to multiply it by 4 or 6. And you’re going to invest that much into your business from day one.
Because for those first few months, you’re probably not going to be making much revenue, and so you need to assume that you are having expenses with $0 in revenue coming in.
So the first thing you’re going to do is make sure that you’re investing enough in the LLC so that it can run in your worst months.
You get paid from the business profits
The second thing you need to do is make sure you’re only paying yourself from the profits of the business.
You cannot take any money out of the LLC bank account that’s necessary for upcoming LLC expenses.
So that means that you need to always keep that 3-month minimum amount in your LLC’s bank account. (But ideally 5-6 months of expenses.)
Unless you elect S corp taxation, what you pay yourself is not a business expense. So you can only pay yourself if the LLC bank account has the money necessary to pay the next 30 days of expenses.
So for example, if your usual monthly expenses for the business are $600, you cannot pay yourself if there’s $500 in the bank account. You are not allowed to take any money out because the bank account doesn’t have enough money to continue operations. Ideally, that bank account has three to six months’ worth of business expenses. If it takes $500 a month to run your business, then you ideally should keep $1,800 to $3,000 in the LLC’s business banking accounts at all times.
Just like with your personal finances, your savings can go into a savings account so you earn interest–it just needs to be a savings account in the LLC’s name.
And at a bare minimum, if you have less than 30 days of expenses in your LLC’s accounts you cannot pay yourself until that number gets above and beyond that 30 days’ worth of expenses. (Unless you elect S corp taxation because then your paycheck is an expense.)
But I don’t have 3-6 months of expenses!
What if you’re in the boat that you say, “Yeah, that sounds great, Kiffanie, but I don’t have three to six months of expenses. How am I going to get there?”
So if you don’t have 30 days’ worth of LLC expenses, your LLC status is going out the window. So automatically if you have less than 30 days of expenses, we need to get you up to 30 days.
And then you are going to slowly build up.
If you don’t know, I love You Need A Budget (AKA YNAB) for both my business and personal budgets. One of the reasons I love YNAB for my business is that many of my big LLC expenses only happen once a year. My website hosting is about $1400 per year and I can plug that amount and the due date into YNAB and it will tell me each month how much to set aside that month so I’m on track to have the full amount by the time it’s due. (We both get a month free if you use my YNAB link*!)
You also probably have once-a-year bills. Try to set aside a few dollars every month so those are taken care of.
You also probably have expenses that you can cut back on or rarely use. Those can be canceled until you have a bigger savings account. Ask yourself, “What are ways that I can reduce my expenses so that my money goes further?”
Another thing that totally revolutionized my thinking about how I pay myself was the book Profit First*.
It encourages you to split every dollar coming into separate accounts. (My hack is to use YNAB to put them into different categories.)
- Some money that comes in goes into your profit account into your reinvestment in your business account.
- Some of it goes into your pay your taxes account.
- Some of it goes into your operating expenses.
- And some of that goes to being able to pay yourself.
And if you follow this formula, your operating expenses are never more than 30 percent of the revenue coming in, so you’re always going to have profits and be able to pay yourself.
TL;DR: Do I need a business bank account for my LLC?
Yes, you need a business bank account for your LLC. And you need to make sure that you are:
- initially investing 3-6 months of expenses in your LLC
- not paying yourself if the LLC doesn’t have the financial resources to pay its bills
Are you overwhelmed by the legal jargon associated with creating an LLC for your creative business?
Do you wish you had a straightforward roadmap to feel confident that you created your LLC right (and know the expectations to keep it legit)? Then this is the book for you!
When you buy LLC for Your Creative Business, you’ll get my step-by-step guidance through the process of creating and maintaining an LLC for your creative business without all the legal confusion.
(If you use the above Amazon affiliate link, I’ll make a small commission, but it doesn’t change the price you pay.)
Hi! I’m Kiff! I’m your friendly legal eagle (and licensed attorney).
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